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Professional Corporation for Real Estate Professionals

MD HB 1028

General Assembly of Maryland

Senate of Maryland

2015 Regulation Section – HB 1028  “Business Occupations and Professions – Real Estate Salespersons and Brokers – Formation of Business Entities and Payment of Commissions”

The legislation signed on April 2, 2015 allow two new incentives to the Maryland Real Estate community professional (1) the bill authorizes, with the “consent” of a licensed real estate broker, one or more licensed real estate salespersons and licensed associate real estate brokers who are affiliated with the licensed real estate broker to form any business entity (LLC’s or Professional Corporations “PCs”) authorized under Maryland law, (2) The new business entity (LLC’s or PCs)  is authorized to receive compensation for the provision of real estate brokerage services from a licensed real estate broker, licensed real estate salesperson, or licensed associate real estate broker.  Our practice understands these new rules and we can assist you in filling a Maryland LLCs or Professional Corporations for you or your team.  Call us at 301-962-1700 for more information.

GENERAL RULE:

  1. With the consent of a licensed real estate broker, one or more licensed real estate salespersons and licensed associate real estate brokers who are affiliated with the licensed real estate broker may organize a LLC or PC,
  2. Each shareholder in the professional corporation or member of the LLC must be either a licensed real estate salesperson or a licensed associate real estate broker, and
  3. Commission due to the salesperson or associate broker can be paid directly to the new corporation or LLC.

Prior to these new regulations, a real estate broker could not pay compensation, in any form, for the provision of real estate brokerage services directly to an entity. The new regulations provide additional tax incentives and deductions not previously allowed to the Maryland real estate community.

VIDEO (MD General Assembly hearing.  (Time to watch 1:03:00 to 1:07:00)

BENEFITS OF SETTING UP A PROFESSIONAL CORPORATION (PCs)

LIMITED LIABILITY 

Most small businesses that consider incorporating do so for the limited liability that corporate status affords. The greatest fear of the sole proprietor or partner—that their life’s savings could be jeopardized by a law suit against their business or by sudden overwhelming debts—disappears once the business becomes a corporation. Although the shareholders are liable up to the amount they have invested in the corporation, their personal assets cannot be touched.

TAX DEDUCTIONS

Professional corporations can deduct similar business expenses as other types of businesses such as fringe benefits for employees, startup and operating costs and equipment purchases. However, there are several tax deductions professional corporations can take advantage that other types of businesses can’t. For example, the salaries and bonuses paid to owners and employees are tax deductible. Fringe benefits that are given to its owners can also be written off as business expenses. Generally, fringe benefits given to owners of other business entities are taxable as income in their personal tax returns (S Corporation & LLCs).

FRINGE BENEFITS 

One advantage C corporations have over unincorporated businesses and S corporations is that they may deduct fringe benefits (such as group term life insurance, health and disability insurance, death benefits payments to $5,000, and employee medical expenses) from their taxes as a business expense. In addition, shareholder-employees are also exempt from paying taxes on the fringe benefits they receive.

SEPARATE TAXPAYERS

The main tax advantage of using a professional corporation instead of a partnership or LLC is that the corporation is a taxpayer separate and distinct from its shareholders. In contrast, LLCs and partnerships use pass-through taxation principles, which require the individual members and partners to report their proportionate share of business income on their personal tax returns.  As an owner or shareholder, this may not always save you more in actual tax dollars, but it significantly limits your personal liability for corporate taxes.

RETIREMENT PLAN BENEFITS AND DEDUCTIONS 

There are significant savings in setting up a retirement plan for your business; eligible contributions are deductible expenses to your business, and all contributions grow tax-deferred until withdrawn. The advantage is that contributions to a retirement plan today can help you meet tomorrow’s goals of financial security.

Employer retirement contributions to a qualify retirement accounts are 100% deductible to the entity and shareholder-employee can benefit by the high contributions amounts.

This chart lists the maximum amounts individuals are permitted to contribute to their retirement plans each year.

2015 2016
Annual employee contribution deferred limit for 401(k), 403(b), or 457 savings plans          18,000           18,000
Annual catch-up contribution limit for 401(k), 403(b) or 457 savings plans if employee is age 50 or over            6,000             6,000
Annual limit for combined employer – employee contributions to a defined contribution plan          53,000           53,000
Profit Sharing, 401(k), SEP and Money Purchase Pension – Employee Annual Compensation Limit        265,000         265,000
401(k), SARSEP, 403(b) and Governmental 457(b) – Highly Compensated Employee Limit
(No requirement for 5% owner)
       120,000        120,000
Profit Sharing, 401(k) and Money Purchase Pension – Top-heavy Plan Key Employee Compensation Limit        170,000        170,000
Defined Benefit – Maximum Annual Benefit at Retirement        210,000        210,000

 

MORE TAX ADVANTAGES

The IRS typically limits the use of the cash accounting method, but it allows professional corporations to use this method even after a company’s yearly revenues exceed $5 million. In addition, those professional corporations that use the cash accounting method can fully deduct the business expenses and interest the company owes to an employee-owner. An additional tax benefit of professional corporations is that they can deduct any losses on the exchange or sale of property between the corporation and one or more of its employee-owners.

ONE DISADVANTAGE

There is one significant tax disadvantage you must be aware of when choosing a professional corporation structure for your business. When your operations are subject to the IRS qualified personal service corporation rules, the agency imposes a 35-percent tax rate on all corporate earnings. A C corporation is also subject to a maximum tax rate of 35 percent, but its initial earnings up to $100,000 are subject to lower rates that progressively increase from 15 to 34 percent. Furthermore, LLC members and partners of partnerships calculate the income tax on business earnings using personal income tax rates, which also progressively increase from 10 to 35 percent.

Give us a call at 301-962-1700 to assist you and your real estate team with the entity setup process.

 

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